The Ultimate Guide to Puerto Rico Crypto Tax

Learn everything you need to know about Puerto Rico crypto tax incentives and why American crypto traders should move to Puerto Rico.

Attention American crypto whales: Puerto Rico crypto tax benefits should be on your radar and here’s why:

You are a young, single, American crypto trader who is currently sitting on a ton of cryptocurrency. You’ve been at this long enough to see your potential to cash in on millions is right around the corner if you play your cards right.  

You have big and very realistic dreams of being a millionaire sitting at your fingertips as many crypto analysts anticipate the next potentially epic bull run is on its way. 

At the same time, you have been terrified by all the hype regarding the IRS crackdown on cryptocurrency.  

You are being advised not to take this crackdown lightly, and you have enough wits to know you must take these warnings very seriously by educating and preparing yourself for what’s to come. 

But, knowing that you may not have reported your past earnings correctly is sending you into a full-blown panic most days. 

You are worried about the IRS coming after your crypto earnings. And, you’re looking to save money on your tax bill.  

However, your biggest concern is making it big when the time comes to cash in your crypto.   

The best time to move is before your cryptos go up. You want the gains to increase as you are in Puerto Rico.

Your cryptos have a gain as of now, and let’s say you move to Puerto Rico today and expect them to get much higher. 

Suppose you wait until bitcoin hits $100,000. All the gain is taxed at US tax rates.

If you expect to sell crypto and avoid taxes on your earnings, you cannot wait until the end of the taxable year. You need to act now to establish your bona fide residency.   

The date you enter Puerto Rico later becomes the date you are considered a bona fide resident of Puerto Rico. 

Therefore, the gains in your crypto up until that date are still taxed by the US when sold. 

After that date, the gains in your cryptos are considered Puerto Rican sourced income and taxed at a 0% capital gains rate.  

Let’s put this all together.  

If you had a Bitcoin, you bought in 2019 and then sold in 2022 after you’ve become a Puerto Rican resident, part of the gain is taxable by the US, and the rest of the gain is taxed by Puerto Rico.  

You want to move to Puerto Rico before your coins go to the moon!

We will explain why crypto traders are moving to Puerto Rico to cash in on special tax incentives and why you need to take action now to take advantage of these tax benefits.     

Our goal is to help get you in front of this problem/opportunity, not to be the last one behind it. Read on to find out what you need to understand about Puerto Rico’s tax opportunity and how to prepare for it as of today.  

Tell Me More About The Fantastic Opportunity For Puerto Rico Crypto Tax Savings

Puerto Rico Crypto Tax

The chances are high that you’ve heard about the fantastic opportunity for US citizens relocating to Puerto Rico to reduce their corporate tax to 4% and to reduce their personal income tax on capital gains to 0%. 

You have a general understanding that Puerto Rico could be your golden ticket to savings on your tax bill. 

And you are beginning to see that the tax-free benefits of that big crypto cash out everyone is anticipating could lead to early retirement if you are living in Puerto Rico when the next bull run hits. 

Still, you are not exactly sure how you qualify for this tax saving act.

You are also unclear about the severe lifestyle changes that will need to be considered.

And most importantly, you have no idea how to prepare.  

Read on to find out how you can qualify, the lifestyle changes that you will need to consider, and how to start preparing now to make it a reality. 

I Want To Understand Puerto Rico Crypto Tax To Save Money On My Crypto Taxes In 2021 And Beyond​

Puerto Rico Crypto Tax

How Do I Save Money On My Crypto Tax Bill?

If you’re looking to save money on your tax bill, you might want to consider relocating to Puerto Rico as soon as possible.

There is no tax benefit until you arrive.

Because while you may not be unable to change how government regulators will decide to tax cryptocurrencies, you can change your tax future!  

Moving to Puerto Rico will allow you to take advantage of Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019), formerly known as Act 22, to pay no federal income tax from here out. 

We know that saving money on your taxes is about one of the most substantial risk-adjusted returns.    

When is the best time to move to benefit from Puerto Rico Crypto Tax?

The best time to move is before your cryptos go up. You want the gains to increase as you are in Puerto Rico.

Your cryptos have a gain as of now.

Let’s say you move to Puerto Rico today and expect them to get much higher. 

Suppose you wait until bitcoin hits $100,000 then all that gain is taxed at US tax rates.

If you expect to sell crypto and avoid taxes on your earnings, you cannot wait until the end of the taxable year. You need to act now to establish your bona fide residency.   

The date you enter Puerto Rico later becomes the date you are considered a bona fide resident of Puerto Rico. 

Therefore, the gains in your crypto up until that date are still taxed by the US when sold. 

After that date, the gains in your cryptos are considered Puerto Rican sourced income and taxed at a 0% capital gains rate.  

Let’s put this all together.  

If you had a Bitcoin, you bought in 2019. 

And then sold in 2022 after you’ve become a Puerto Rican resident.  

Part of the gain is taxable by the US, and the rest of the gain is taxed by Puerto Rico.  

You want to move to Puerto Rico before your coins go to the moon!

Can I Move To Puerto Rico To Avoid Taxes?

You can avoid tax by moving to Puerto Rico through one of the tax programs, formerly named Act 22 (now referenced as Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019). This Act requires that you have NOT lived in Puerto Rico during the previous 15 years. Therefore, allowing you to take advantage of a 4% income tax rate, 0% dividend rate, and 0% capital gains tax rate. 

Please be aware that BOTH YOU and YOUR BUSINESS need to make a literal move to Puerto Rico. It has to become your “tax home.” Later, we talk about making closer connections to Puerto Rico than the United States. 

Why Should You Move To Puerto Rico?

Act 22 was born as the Resident Individual Investor Act. It was enacted in Puerto Rico in 2012 to promote the relocation of high-net-worth individuals to Puerto Rico. The law’s goal was to provide attractive incentives to encourage investors to relocate to Puerto Rico. 

It has since been updated and bundled with other popular tax incentives and now called Act 60-2019, replacing the name Act 22 into law on July 1, 2019, with an effective date of January 1, 2020. 

*Please also note that new applicants will be subject to the most recent requirements from January 1, 2020.  

Puerto Rico has a unique tax status.   

It is a US territory, but it is viewed as a “foreign country” for US federal income tax purposes. 

Therefore, an individual tax applies to its residents and tax incentives geared to promote its economic development that may be very luring for US Crypto Traders.

If both you (as a bona fide resident) and your business (as your tax home) move to Puerto Rico—

“Then all your future capital gains on stocks, bonds, and other assets as defined to include commodities, currencies, and any other digital asset or blockchain technology, a.k.a. Crypto becomes tax-free.

In short, all your dividends, interest, and royalties you may receive from Puerto Rican sources become tax-free.” (1)

What Was Puerto Rico’s Act 22, And What Is It Called Now?

Puerto Rico’s Act 22 was the Act to Promote the Relocation of Individual Investors to Puerto Rico. It has since been updated and bundled with other popular tax incentives and now called the Puerto Rico Incentives Code (Act 60-2019) referenced in Chapter two. It is replacing the name Act 22 with Act 60-2019 as the law on July 1, 2019, with an Effective Date of January 1, 2020.  

*You will be obliged to follow the most recent requirements applying as a new bona fide resident.

It intended to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all interest and dividends earned AFTER the individual becomes both a bona fide resident of Puerto Rico. Along with filing their business in Puerto Rico, as their tax home.

What Are The Benefits Of Chapter Two Of Act 60-2019, Formerly Known As Act 22?

  • 100% tax exemption on interest and dividends derived, AFTER becoming a Puerto Rico resident and through December 31, 2035. (2)
  • 100% tax exemption from Puerto Rico income taxes on all capital gains accrued, AFTER establishing residency. (2)
  • 100% tax exemption concerning gains from the sale of property acquired AFTER the individual becomes a bona fide resident of Puerto Rico if the sale takes place before January 1, 2036. (2)
  • Investment income accrued before becoming a bona fide resident of Puerto Rico will be taxed at 10% if realized within ten years after residency is established. If the gain is achieved after the ten years, but on or before December 31, 2035, the tax is 5%. (2)
  • Capital gains appreciation on investments that occur after becoming a bona fide Puerto Rico resident can allocate to Puerto Rico.

Special rules apply to the gain from the sale of securities acquired before establishing residence in Puerto Rico.

We asked Juan Robles, CPA Partner Etrends Group, about these special rules. 

Robles states that:

“Any appreciated property acquired in the US and later sold while a PR resident will still have US tax implications. For US tax purposes, virtual currency is treated as property, and US Regulation Section 1.937-2(f) provides that any gain may be subject to an allocation based on holding period (bifurcation rule)”  

What Is Act 60-2019?

“The Governor of Puerto Rico signed into law the Puerto Rico Incentives Code as Act 60‐2019 (the “Incentives Code”). In general, the Incentives Code compiles into a single code many of the Puerto Rico tax incentives laws used to promote the island’s economic development, with some modifications, to establish a new transparent and efficient process for granting and overseeing all the incentives afforded under the Puerto Rico’s incentives laws. 

The Incentives Code consolidates various tax decrees, incentives, subsidies, and benefits, including Act 20, the Promotion of Export Services Act, and Act 22, the Act to Promote the Relocation of Individual Investors to Puerto Rico.” (3)

I Want To Understand The Lifestyle Changes That I Need To Consider By Moving To Puerto Rico.

Puerto Rico Crypto Tax

I’m not a crypto billionaire. Do Puerto Rico’s tax incentives still make sense for me?

Yes! You may not be a crypto billionaire yet, but plenty of you are sitting on a lot of crypto that you want to sell when it’s worth it. Many crypto traders are going to Puerto Rico with the anticipation of becoming a crypto billionaire.  

Cryptocurrencies and other crypto assets are explicitly included as eligible for tax exemption.

And, there is no better risk-adjusted return than saving money on taxes. Gain an extra 30% return on investment without the risk by saving on your taxes. Compounded over your lifetime, that is a considerable amount of savings for changing nothing but the place you legitimately call home.

Do You Have To File Taxes If You Live In Puerto Rico?

Yes, residents of Puerto Rico pay federal payroll taxes, such as Social Security and Medicare taxes.  

“PR source income earned by US citizen or resident alien is excluded from US taxes (US Code Section 933 exclusion)” 

-Juan Robles, CPA Partner Etrends Group

“Any PR resident that has US source income must file federal taxes.”

-Juan Robles, CPA Partner Etrends Group 

I Want To Start Preparing Now To Make Saving On My Puerto Rico Crypto Tax A Reality.

Puerto Rico Crypto Tax

What Is The First Action Step To Take?

The first and most critical step is wrapping your head around how fast you have to make this happen if Puerto Rico is the right move for you.  

You want to be a bona fide resident of Puerto Rico to save on your tax bill.

Crypto Traders need to understand what rules they need to comply with to take advantage of this opportunity legally.

  • They must thoroughly understand residency compliance and form a closer connection to Puerto Rico than to the US For more information, consult the Etrends Group in Puerto Rico.

How Can You Prepare For This Move To Puerto Rico?

  • You must become a bona fide resident of Puerto Rico.
  • You must create closer connections. Meaning, you must create “closer connections” to Puerto Rico than the United States.

How Long Do You Have To Live In Puerto Rico To Be A Bona Fide Resident?

Generally, you must reside there for at least 183 days a year. There are many grey areas and nuances that you want to be clear on if you will take this step, so be sure to position yourself with the right team of crypto tax law and Puerto Rico tax experts from the start. You also have to do the paperwork, applying with the tax authority there.

An Act 22 Decree application must include the payment of a $750 filing fee, but do expect to invest thousands more into applying and relocating yourself here.  

What Is A Bonafide Resident Of Puerto Rico?

A bona fide resident of Puerto Rico can exclude their Puerto Rico source income from US federal tax. Generally, under IRS §937 and the regulations thereunder a bonafide resident of Puerto Rico is an individual who:

You must qualify as a bona fide resident of Puerto Rico FOR THE ENTIRE TAXABLE YEAR for the US IRC’s purposes and (2) the income must constitute Puerto Rico source income under the US IRC.

Please note the wording to qualify for the exclusion for a taxable year. You must be a bona fide resident of Puerto Rico for the “Entire Taxable Year.” 

You will have to have been in Puerto Rico one full taxable year. 

Again, you must generally be physically present and living in Puerto Rico for AT LEAST 183 days during the taxable year.

You must not have a tax home outside of Puerto Rico during the taxable year.

You must pay an annual charitable contribution for a non-profit entity of $10,000. It must be paid annually under the new Act 60-2019.

You must purchase property in Puerto Rico within two years of obtaining the decree under the new Act 60-2019.   

This property must be your primary residence throughout the validity of the decree. You must hold exclusive and complete ownership of the residential property for the duration of the decree. Joint ownership with your spouse qualifies. 

You cannot rent the property out to someone else.  

The determination of whether or not an individual is a bona fide resident of Puerto Rico for a taxable year is made according to rules outlined in the regulations issued under Section 937(a) of the US IRC.

You must not have a closer connection to the United States or a foreign country than Puerto Rico.  

How Do I Create Closer Connections To Puerto Rico?

For example, 

  • Where is your bank account?  
  • Where is your driver’s license?  
  • Where are your relevant documents located?   
  • Where is your high school diploma? Your college degree?  
  • Where are your wife/husband and children living?  
  • Where does your mail go?
  • Where are your investments?  
  • Where do you own your house?

If you have answered the US, you have not created closer connections to Puerto Rico than the US Make sure that you are moving your real life to Puerto Rico.  

There are various factors that the individual must meet to qualify as a “bona fide resident of Puerto Rico.” 

They can be extraordinarily intensive, and a variety of factors will be considered.

Therefore, individuals seeking to take advantage of these benefits should consult with our Crypto Tax Specialist, Clinton Donnelly, and Puerto Rico Tax Experts Etrends for clarity and guidance.  

What Is Law 40-2020?

On April 16 Puerto Rico Governor Wanda Vazquez approved, Law 40-2020, that alters the way tax incentives are provided to new residents. The previous annual fee of $300 for those who moved to the island and applied for the incentive has been substantially increased. It has now jumped up to $5,000. A new tax contribution deduction is equal to 3% for anyone who earns $100,000 or less.  (5)

“There is some lobbying going on related to the increase of the filing fee charge. As it stands today (May 25, 2020), it applies to all Act 22 holders.

The additional 3% income tax reductions apply to tax years 2020 and forward.” – Juan Robles, CPA Partner  Etrends Group

To summarize total costs, including Law 40-2020:

Now, for anyone wishing to move to the island, the upfront expenses are much higher, somewhat negating the existing tax incentives. There is a $750 filing fee, a $5,000 “special fund fee” if the filing application is approved, a $10,000 obligatory annual contribution (with the possibility of having the fee made in two payments), and the new $5,000 fee. (5)

On the bright side, conditions for Act 20, known as the Export Services Act–now part of Chapter 3, Incentives for Export Services– remained largely the same. (1)

Under the new rules, If your Act 20 company churns $3,000,000 (or more) of revenue a year, you will need to employ a full-time employee in Puerto Rico. And that single employee can be you actively managing your business. (1)

What Does A  Membership Do To Protect You From The IRS In Puerto Rico And On The Mainland?

Just because you are in Puerto Rico doesn’t mean you are exempt from US audits. As long as you are a US citizen, you do not escape the eye of the IRS.

Regardless of where you live in the world, you need to file an income tax return with the US as a citizen of the United States. Going to Puerto Rico doesn’t mean you don’t have to file a US income tax. 

If you make less than $12,000, you don’t have to file a tax return. But, if you are still making an income above $12,000 worldwide after subtracting Puerto Rican income, you will have to file a tax return in the US. 

Therefore, you want assurance that you have crypto representation should you get the IRS’s dreaded letter.  

Our goal is to help get you in front of this problem/opportunity by using annual tools like CryptoTaxAudit to provide you with representation as long as you are a member should you need representation with the IRS.

Crypto.Tax.Audit

Well done! By reading this post, you have already taken the first step toward understanding an excellent solution to protect your future Crypto earnings in light of the current IRS crackdown on Crypto earnings.  

You have also come one step closer to having an action plan to realize your dreams of becoming a Crypto millionaire when the next potential epic bull run hits.

Your potential to cash in on millions is right around the corner if you play your cards right.  

Remember, if you expect to sell crypto and avoid taxes on your earnings, you cannot wait until the end of the taxable year. You need to act by July 2 to get your 183 days in Puerto Rico.

Our goal is to help get you in front of this problem/opportunity by using Crypto Tax Audit tools to provide you with representation should you need it with the IRS.  

Donnelly Tax Law is the leading US tax firm for preparing complex US tax returns for Americans, including Crypto Traders and people with foreign assets. 

We are currently partnering with a Puerto Rican tax and accounting firm, Etrends Group, for Act 22 clients

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